News

Dubai Calendar 2020 Spread Widens to Record High

The calendar 2020 spread for derivative contract first-line Brent against first-line Dubai widened to an all-time high of US$5.17/b Monday, data from S&P Global Platts showed, indicating the market's valuation of the sour crude grade going into 2020.

The contract, which is a monthly cash-settled futures based on the difference between the ICE daily settlement price for first-line Brent and the Platts daily assessment price for prompt Dubai, indicates the premium that the light sweet Brent crude grade commands over the medium sour Dubai grade.

Activity on the calendar 2020 spread has been active since late February on Intercontinental Exchange with bids increasing from US$4.50/b in late February to US$4.95/b late last week. Offers were sparse, ranging from US$5-US$5.25/b.

A slump in the fuel oil market in 2020 after new emission regulations cut marine demand is now priced into the forward market, Bank of America Merrill Lynch said in a research note Friday.

The International Maritime Organization is due to cut global bunker fuel sulfur limit to 0.5% starting January 1, 2020, from 3.5% currently, forcing shipowners either to switch to using cleaner, more expensive fuels or install equipment to clean their emissions.

The note argued that the price spread between European and Middle Eastern crude futures may widen further. Sour crude grades with a higher yield of fuel oil will become less profitable in 2020 as marine fuel demand shifts.

"The Brent/Dubai crude oil forward has started to move, but it is still relatively tight compared to history," the note said. "As OPEC and Russia prepare to unwind their 1.8 million b/d supply cut deal over the next couple of years, a weak residual fuel market should have a big impact on medium and heavy sour grades."

Demand for distillate-rich grades to make lower sulfur fuel oil to meet the new specs set forth by the IMO is also expected to increase, said sources, adding that this could result in heavy sour and medium sour crude grades to head into steep discounts as refiners would prefer middle distillate-rich light sweet grades.